Select Committee on Environmental Audit Second Report


Memorandum from HM Treasury

  This memorandum responds to the request for information from the Environmental Audit Committee, following up the evidence provided by the Financial Secretary on 14 March 2001 (Environmental Audit Committee, Minutes of Evidence, HC 3331-i, 2000-01). The Committee's questions are shown in italics below.


1.   In discussing whether or not the Treasury's tax strategy was ad hoc, Mr Timms referred to the principles set out in the 1997 Statement of Intent. But would the Treasury agree that these principles themselves do not constitute a strategy? Would the Treasury also like to comment on the difference in wording between the 1997 Statement and the reworking of it in the 1999 Pre-Budget Report. The former states that "over time, the Government will aim to reform the tax system . . .", whereas the latter states that ". . . the Government will consider using the tax system...on a case by case basis." Does not the wording of the latter suggest that the Treasury's strategy is indeed somewhat ad hoc?

HMT Response:

  The Government remains committed to the principles set out in the 1997 Statement of Intent on environmental taxation. These principles were reiterated in the 1999 Pre-Budget Report. In aiming to reform the tax system to deliver environmental benefits the Government will consider each potential opportunity on a case by case basis, taking account of its wider economic and social objectives. The 1999 Pre-Budget Report also noted that taxation could have a role to play alongside other policies such as trading, local charging, public spending, regulation and education. There is no inconsistency between these objectives: in seeking to move the burden of tax from "goods" such as labour and capital to "bads" such as pollution the Government needs to consider whether each potential tax change meets the tests of good taxation; and whether it would be complementary to other policy measures. The responses to specific environmental issues will vary according to their nature, but the principles underlying the responses will be the same.

2.   In the Statement of Intent the Treasury stated that the Government "will explore the scope for using the tax system to deliver environmental objectives as one instrument in combination with others." Has the Treasure carried out any research in support of this assertion to identify environmentally harmful activities and the scope for introducing and extending environmental taxes in terms of the areas and sectors of economic activity they cover?

HMT Response:

  The Government's strategy for tackling threats to the environment and the quality of life is set out in the documentation for Budget 2001. The Government has introduced a range of measures to address these threats under the themes of tackling climate change and improving air quality; regenerating Britain's towns and cities; and protecting Britain's countryside. The Government continues to review options for introducing and extending environmental taxes in each of these areas. The introduction of the aggregates levy has, for example, been based on detailed research. It should also be noted that research on environmental matters is carried out by a range of Government departments including DEFRA, DTLR, DTI and Revenue Departments.

3.   Mr Timms referred to the fact that any major change in the perverse VAT incentives favouring greenfield development would require a lot detailed research on the likely social, economic and environmental impact of such a move. Is this not precisely the kind of work the Treasury should be doing to construct an environmental tax strategy? Why has the Treasury not been carrying out this research?

HMT Response:

  Currently most repairs to homes are subject to VAT at 17.5 per cent and the sale of a new house is zero rated. Lord Rogers, in his report Towards an Urban Renaissance, suggested that the rate of VAT on new build and on repairs be harmonised at a reduced rate.

  In Budget 2001 the Government announced a reduced rate of 5 per cent for some specific conversion and renovation services (for example, the renovation of a dwelling that had been empty for three years) based on analysis carried out by HM Customs and Excise.

  The Treasury and Revenue Departments continue to carry out research into the likely social, economic and environmental effects of a range of measures which could form part of the Government's environmental strategy.

4.   Does the Treasury have any strategy for greening the Corporation tax system beyond the introduction of enhanced capital allowances funded from the Climate Change Levy? If not, is the Treasury carrying out any research in this area?

HMT Response:

  The Government recognises that many environmental improvements by business require investment and it believes that there is a case for extending the availability of enhanced capital allowances to include certain other environmental objectives and other technologies. In Budget 2001 the Government therefore announced proposals for setting up a Green Technology Challenge, with the intention of offering enhanced first year capital allowances for further environmental objectives and new technologies. The Government carried out a consultation on the environmental areas and technologies which could form the priorities for this scheme during summer 2001. The consultation has recently closed and the results are currently being considered. Furthermore, for example, the Government has recently introduced 100 per cent enhanced capital allowances for owners and occupiers for creating flats over shops and similar commercial premises for letting, and it has introduced a 150 per cent accelerated payable tax credit for owners and investors for the costs they incur in cleaning up contaminated land.

5.   Mr Timms referred on a number of occasions to the increasing need to put in place monitoring mechanisms to assess the effectiveness of the environmental measures which the Government had now put in place. What specific mechanisms does Mr Timms have in mind, and when will the Treasury set out what it plans in this area?

[This response also addresses points 9 and 10 raised by the committee]

    9.  In modelling environmental impacts, has the Treasury attempted to assess fuel duty reductions and reductions on lorry VED in a holistic way, given the fact that the combined impact of both measures may stimulate more road use than appraisals of each measure separately might suggest?

    10.  Mr Timms referred to the fact that IR had done a good deal of work to plan how we can see whether the million tonnes of carbon emissions reduction that we expect from changes in company car taxation is actually being achieved. The environmental and regulatory impact assessment only includes two lines on this subject. To what is the Financial Secretary referring?

HMT Response:

  The Government remains committed to evaluating and appraising the impact of environmental tax measures. The results are given in table 6.2 of the Budget document.

  In assessing the impacts of particular policy it is essential to draw out the impacts of individual policies set against a background of business as usual. If there is a case where a package of measures are presented, such as the landfill tax and the landfill tax credit scheme, impacts are considered in tandem.

  Specifically, on the subject of company car taxation, the Inland Revenue is planning to evaluate extensively the outcomes of the reforms to company car taxation from 2002-03 onwards under which tax paid will depend on cars' carbon dioxide emissions. The Inland Revenue will analyse the data from tax returns to see how the numbers and types of company cars change over time. It will also commission surveys of employers and employees and do economic modelling work to help with the evaluation process.

6.   The Treasury's aims and objectives do not contain any reference to environmental protection and sustainable development. Does the Treasury accept that the phrase "sustainable growth" will be widely understood in economic terms—particularly when the Treasury's overall target is to raise by 2004 the trend rate of growth from the current estimate of 2.5 per cent—and that it would now be appropriate to amend the aim to refer specifically to "sustainable development"?

HMT Response:

  The Treasury's aim, reflecting the Government's primary economic objective, is to raise the rate of sustainable growth. Progress against this aim will be measured by looking at rates of economic growth. However, it has been made clear, for instance in recent Budget and Pre-Budget Reports, that economic growth must be sustainable in social and environmental terms too.

7.   Mr Timms acknowledged that the Climate Change Levy and other taxes were to be revenue neutral. If they are so, the percentage of taxes from environmental measures will increase. Is it not inconsistent therefore for Mr Timms to be reluctant to accept this as a measure?

HMT Response:

  No. The Government does not believe that it is sensible to measure the effectiveness of environmental taxes simply in terms of the proportion of revenues which they generate. Such a measure would, for example, not record the effects of tax incentives such as enhanced capital allowances or incentives to encourage the use of greener fuels. In addition, the revenue from successful environmental taxes can be expected to decline over time if they change behaviour.

8.   Why has the Treasury no discussed eco-efficiency in chapter 3 of the Budget Report or in the accompanying budget documentation and supplementary report on productivity? Does this not represent a significant missed opportunity, following the much-heralded DTI sustainable development strategy?

HMT Response:

  All Budget measures are worked up within the Government's sustainable development strategy. However, to provide a coherent environmental analysis of the Budget, significant environmental impacts associated with any policy are considered in chapter 6 and in the environmental appraisal table, rather than in the individual chapters.


9.   In modelling environmental impacts, has the Treasury attempted to assess fuel duty reductions and reductions on lorry VED in a holistic way, given the fact that the combined impact of both measures may stimulate more road use than appraisals of each measure separately might suggest?

HMT Response:

  Please see response to point 5.

10.   Mr Timms referred to the fact that IR had done a good deal of work to plan how we can see whether the million tonnes of carbon emissions reduction that we expect from changes in company car taxation is actually being achieved. The environmental and regulatory impact assessment only includes two lines on this subject. To what is the Financial Secretary referring?

HMT Response

  Please see response to point 5.


11.   The Financial Secretary made reference to the fact that negotiations with the European Commission for state aids were focusing on a 10 year period. Does the Treasury therefore anticipate that existing 80 per cent rebates for negotiated agreement holders will terminate in 2011?

HMT Response:

  The European Commission has approved the 80 per cent discount for energy-intensive sectors of industry which have agreed to meet energy-saving targets for a period of 10 years. There are currently no plans for how the Climate Change Negotiated Agreement Scheme might be developed or extended beyond 2011. The Government would anticipate that such decisions would be made closer to the time, in the context of circumstances at that time.

12.   How many companies does the Treasury expect to join the Emissions Trading Scheme during the first year (2001-2002)?

HMT Response:

  The emissions trading scheme is the responsibility of DEFRA.

  There are two ways in which firms can enter into the UK Emissions Trading Scheme. The first is through a Climate Change Levy Negotiated Agreement, where firms can opt to trade to meet their first emissions targets at the end of 2002. Approximately 13,000 individual facilities are covered by these agreements. The second way a firm can enter into the scheme is to decide to take part in the proposed January 2002 auction process. Firms have until the end of December to register an interest in joining the scheme. It is not possible to tell, at this stage, the total number that will volunteer into the scheme. Working closely with a wide range of businesses, the Emissions Trading Scheme has been designed to be accessible to as wide a constituency as possible, so as to give as many UK firms as possible valuable early experience of emissions trading. But the success of the scheme will be judged on whether it delivers a well-functioning market rather than any particular number of participants.

13.   Will the £30 million to be made available in 2003-04 for the Emissions Trading Scheme be restricted to those companies which join in the first year?

HMT Response:

  The emissions trading scheme is the responsibility of DEFRA. The £30 million (after corporation tax) available from 2003-04 will be available to firms joining in the first year of the Emissions Trading Scheme. Decisions on funding for firms entering into the scheme subsequent to the first year will be taken in the next Spending Review in the light of experience of the first year of trading.


14.   What monitoring did the Treasury carry out in the course of Spending Review 2000 and before PSAs were drafted to ensure that departments were building environmental protection and sustainable development into their reviews? How did the Treasury, for example, ensure that environmental considerations were adequately built into the Department of Health's review and the work of the NHS?

HMT Response:

  The integration of sustainable development into SR2000 was discussed several times at meetings of Green Ministers, including the requirement for Green Ministers to be involved in their department's preparation and conduct of the Review. Treasury Ministers wrote to and spoke to colleagues on a number of other occasions to emphasise the importance of sustainable development in the Review.

  The guidance circulated to departments also made clear the need both to build sustainable development into the Review. As the Review progressed, and as PSAs were drafted, Treasury officials kept under close review the coverage of sustainable development issues and the headline indicators of sustainable development. It should be noted that it is for each department to ensure that environmental considerations are built into their day-to-day work.

15.   The pro forma for SDAs which departments were obliged to complete includes standard sections on—for example—procurement, fraud, consumer aspects, sickness absence and electronic government. Why was a section on Greening Government not included?

HMT Response:

  The wide range of Greening Government issues are best covered in the annual reports of the Green Ministers Committee, which have become a well-established vehicle for reporting environmental performance across Government departments, including against Government-wide targets.

  The Green Ministers Report gives a much fuller picture of the wide range of issues covered by "Greening Government" than would have been possible in Service Delivery Agreements, and any material in departmental SDAs would have been overtaken relatively quickly by the next Green Ministers Report.


16.   The joint DETR/Treasury note on procurement requires decisions to be based on whole life costs and refers to the UK's domestic policy of not using procurement to achieve other policy ends. How does the policy of purchasing wood from environmentally sound origins fit in with this guidance? Can the purchase of such wood be justified in terms of whole-life costs? If not, on what basis can it be justified?

HMT Response:

  There is no conflict between the guidance set out in the Joint Treasury/DETR note and the timber procurement initiative.

  Paragraph 2 of the joint note explains that the definition of value for money, under the Government's procurement policy, is "the optimum combination of whole life cost and quality to meet the user requirement". This means that, in all cases, contracts must be awarded to the bidder who provides the best combination of whole life costs and quality in meeting whatever the user's requirement or specification happens to be.

  The requirement, or specification, is a matter for the contracting authority. It can specify its requirements in green terms, in line with its environmental strategy or wider Government environmental policy. Such strategies and policies will take account of economic arguments related to sustainability. It will then be a matter of accepting the bid which offers the best whole life cost/quality combination in meeting that "green" requirement or specification.

  Paragraph 7 of the joint note explains this further. It states that: "In preparing the specification the end user should decide the extent to which it should cover environmental requirements, taking account of the Government's environmental policies and the department's own strategy for greening its operations." Paragraph 12 is also relevant. It states that "The justification (for extra cost) might be that Ministers have decided collectively as a matter of policy that the Government should not buy a particular substance or material on the grounds that it is harmful to the environment."

  Of course, this does not mean that, in specifying requirements, costs and affordability issues are not relevant. It is simply that these are matters for Departments to consider, in the light of their "green" and other policy commitments.

  In the case of timber, it has been decided, as announced in the Parliamentary answer by Michael Meacher of 28 July 2000, that, as a matter of environmental policy, all Government Departments and their agencies are now required actively to seek to buy timber and timber-related products from sustainable and legal sources. Departments will need to take this requirement into account in specifying relevant requirements. They will then, as usual, award their contracts to the bidders whose bids provide best value for money in meeting those requirements.

  The issue about not using procurement to pursue other aims is not meant to cover legitimate use of specifications which are relevant to the performance of the contract. The concern is with attempts to use procurement to take account of a contractor's policies or initiatives which are not relevant to the performance of the contract and which distort the process of choosing the bid which combines the optimum combination of whole life cost and quality.

October 2001

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 12 February 2002